Export incentives and cash discounts must be treated as operating revenue for TNMM analysis | Transfer Pricing (Sec 92C) : ITAT

The Delhi Income Tax Appellate Tribunal set aside the Transfer Pricing Officer's order, directing that export incentives and cash discounts be treated as operating revenue for the Transactional Net Margin Method and that comparables must be selected on a proper Functions-Assets-Risks basis.

Background & Facts

The Dispute

Lama Rice Private Limited (the assessee), a subsidiary of Lama Holdings Limited, engaged in the export of Basmati rice to its associated enterprise, Saleh Abdulaziz Babaker Sons & Co. (the AE). The assessee claimed that the international transaction amounting to Rs.276,84,54,517 was at arm's length. The Assessing Officer (AO), acting on directions of the Dispute Resolution Panel (DRP), incorporated a transfer pricing addition of Rs.10,40,76,668 based on the Transfer Pricing Officer’s (TPO) benchmark, which the assessee contested.

Key Facts

• Shareholding: Lama Holdings Limited holds 98.03% of Lama Rice; Javed Gaya and Khalid Vohra each hold 0.99%.
• International transaction with AE valued at Rs.276,84,54,517 for the AY 2022-23.
• The assessee applied the Transactional Net Margin Method (TNMM) using Operating Profit/Operating Cost (OP/OC) as the profit level indicator, arriving at a margin of 2.25%.
• The TPO rejected the assessee’s comparables and introduced six new ones, computing an arm's length margin of 4.88% and adding Rs.10,40,76,668 to income.
• The assessee argued that export incentives (Rs.88,81,830) and cash discounts (Rs.2,89,45,460) were part of operating revenue and should not be excluded.
• The assessee cited statutory provisions (Section 92CA, Rule 10TA) and several ITAT and High Court precedents supporting inclusion of such items.

Procedural History

• 02.06.2023: Statutory notice under Section 143(2) issued.
• 29.08.2023 & 07.11.2023: Notices u/s 92CA(2) issued requesting details of international transactions.
• 22.12.2023: Assessee replied with transfer pricing report and related documents.
• 11.11.2024 & 26.11.2024: TPO issued further notices for additional evidence.
• 27.12.2024: TPO issued show-cause notice proposing rejection of the 2.25% margin.
• 08.01.2025: Assessee replied, defending the 2.25% margin and the inclusion of export incentive and cash discount.
• 24.01.2025: TPO order computed margin at 1.14%, excluding the incentive and discount.
• 10.03.2025: Draft assessment order u/s 144C issued, reflecting the addition of Rs.10,40,76,668.
• 22.12.2025: DRP issued directions under Section 144C(5) confirming the TPO’s adjustment.
• 08.01.2026: Final assessment order dated 08.01.2026 passed by AO.
• 19.08.2026: ITAT pronounced the present order, allowing the appeal.

Relief Sought

The assessee sought (i) reversal of the transfer pricing addition of Rs.10,40,76,668, (ii) inclusion of export incentive and cash discount in operating revenue for TNMM computation, and (iii) proper selection of comparables based on FAR analysis.

The Legal Issue

Whether, for the purpose of applying the Transactional Net Margin Method under Section 92CA of the Income-Tax Act, export incentives and cash discounts must be treated as part of operating revenue, and whether the Transfer Pricing Officer was justified in rejecting the assessee’s comparables without a proper Functions-Assets-Risks (FAR) analysis.

Arguments Presented

For the Appellant

The assessee contended that (a) Rule 10TA of the CBDT Notification No. S.O. 2810(E) defines operating revenue inclusively and does not expressly exclude export incentives or cash discounts; (b) Precedents such as M/s. ZF Rane Automotive India Pvt. Ltd. v. DCIT (2025) and The Commissioner of Income Tax-2 v. M/s. Welspun Zucchi Textiles Ltd. (2017) hold that such items are operating income; (c) The TPO’s selection of comparables ignored the functional profile of the assessee, which is a pure trader with no manufacturing risk, thereby violating the FAR principle; (d) Segmental data showed that the rejected comparable Kothari Products Ltd. derived 98.87% of revenue from trading, warranting its inclusion.

For the Respondent

The Revenue argued that (a) The TPO correctly excluded export incentives and cash discounts as they are non-operating in nature under the Safe Harbour Rules; (b) The newly introduced comparables were functionally similar, reflecting broader agri-commodity trading activities; (c) The AO’s assessment was within the statutory time-limit and complied with Section 144C(13); (d) The DRP’s findings supported the TPO’s methodology and were binding on the Tribunal.

The Court's Analysis

The Tribunal first examined the definition of "operating revenue" under Rule 10TA(K) of the CBDT Notification S.O. 2810(E). It observed that the rule lists specific exclusions (interest, foreign-exchange gains, etc.) but makes no mention of export incentives or cash discounts. Referring to M/s. ZF Rane Automotive India Pvt. Ltd. v. DCIT (2025) and Welspun Zucchi Textiles Ltd. (2017), the Tribunal held that both export incentives (DEPB) and cash discounts arise from normal business operations and therefore constitute operating revenue.

"In view of the foregoing facts, he submitted that statutory provisions and binding judicial precedents, it is respectfully submitted that export incentive and cash discount are operating revenues and ought to be included while computing the operating margin of the assessee."

The Tribunal then turned to the selection of comparables. It reiterated the established principle that comparability under the arm’s-length standard requires a rigorous FAR analysis. Citing Hyundai Motor India Ltd. v. ACIT (2021) and Alliance One Industries India Pvt. Ltd. v. DCIT (2023), the Tribunal emphasized that functional dissimilarities - such as manufacturing versus pure trading - render a company unsuitable as a benchmark.

Applying this test, the Tribunal found that the TPO’s inclusion of companies engaged in milling, processing, or diversified commodity trading (e.g., Athena Tradewinds, Shiv Shakti Inter-Globe, Tanna Agro Impex, GRM Overseas, Chaman Lal Setia, Sri Lalitha Enterprises) ignored the assessee’s limited risk profile. Conversely, Kothari Products Ltd., which derived 98.87% of its revenue from trading, satisfied the FAR criteria and should have been retained.

The Tribunal also noted that the AO’s assessment order was passed beyond the limitation period prescribed under Section 153 of the Act, reinforcing the need to set aside the addition.

In sum, the Tribunal concluded that the TPO erred both in (i) excluding export incentives and cash discounts from operating revenue and (ii) rejecting valid comparables without a proper FAR analysis. Accordingly, it directed the TPO to recompute the OP/OC margin including the aforesaid incomes and to revise the list of comparables as specified.

The Verdict

The appeal filed by Lama Rice Private Limited is allowed. The Tribunal directs the Transfer Pricing Officer to (i) include export incentive of Rs.88,81,830 and cash discount of Rs.2,89,45,460 in the assessee’s operating revenue for TNMM computation, (ii) recompute the operating profit margin accordingly, (iii) exclude Athena Tradewinds, Shiv Shakti Inter-Globe, Tanna Agro Impex, GRM Overseas, Chaman Lal Setia and Sri Lalitha Enterprises from the final comparable list, and (iv) retain Kothari Products Ltd. as a valid comparable. The assessment addition of Rs.10,40,76,668 is set aside.

What This Means For Similar Cases

Export Incentives and Cash Discounts Are Operating Revenue

Practitioners must treat DEPB and cash-discount income as part of operating revenue when applying TNMM, citing Rule 10TA and the above precedents. Failure to do so may lead to an inflated arm’s-length margin and unwarranted adjustments.

• Include export incentives and cash discounts in the OP/OC calculation.
• Cite Welspun Zucchi Textiles and ZF Rane for supporting authority.

FAR-Based Comparable Selection Is Mandatory

When the assessee is a pure trader, comparables must share the same functional profile. Courts will reject benchmarks that involve manufacturing or diversified activities unless a detailed FAR analysis demonstrates similarity.

• Obtain segmental data of potential comparables.
• Conduct a documented FAR analysis before finalising the benchmark set.
• Be prepared to challenge the inclusion of companies with dissimilar risk-asset-function structures.

Observe Statutory Time-Limits

Assessments passed beyond the limitation period under Section 153 are vulnerable to reversal. Ensure that any assessment, especially under Section 144C, is issued within the prescribed timeframe.

• Verify the date of assessment order against the statutory limitation.
• Raise limitation objections promptly if the deadline is missed.

Practical Checklist for Transfer-Pricing Appeals

• Verify inclusion of all operating-related incomes per Rule 10TA.
• Prepare segmental revenue breakdowns for each comparable.
• Document FAR analysis with functional, asset and risk matrices.
• Cross-check assessment dates with Section 153 limitation.
• Cite relevant ITAT and High Court precedents supporting your position.